Canadian stocks caught between gold’s slip and inflation’s grip

A surprise jump in Canadian inflation has rattled markets and cast new uncertainty over the Bank of Canada’s next move, sending the S&P/TSX Composite Index to its worst day since April.  

According to Reuters, annual inflation accelerated to 2.4 percent in September, outpacing analyst expectations and prompting investors to scale back bets on an imminent interest rate cut.  

Money market odds for a 25-basis-point cut dropped to 74 percent from over 86 percent before the data was released. 

The inflation surprise weighed heavily on the materials sector, which fell 6.9 percent as gold prices retreated more than 3 percent—the steepest drop in years, according to Bloomberg.  

Investors booked profits after the precious metal reached record highs in the previous session, leaving gold miners—now a 12 percent weighting on the TSX—among the hardest hit.  

“It is fairly clear that the material sector is going to take it on the chin today, given what’s happening in gold and silver prices,” said Douglas Porter, chief economist at BMO Capital Markets, as reported by Reuters. 

Meanwhile, heavyweight financials managed a modest gain of 0.2 percent, benefitting from tempered rate-cut expectations. 

Scotiabank strategists, as cited by Bloomberg, believe that strong quarterly reports from US banks bode well for Canadian banks, which account for 30 percent of the S&P/TSX Composite Index.  

They suggest that third-quarter earnings per share for the index could approach or even exceed the record set in the previous quarter. 

With the US government shutdown limiting new data, Canadian economic releases are under even greater scrutiny.  

“We do have to focus a lot on the Canadian economic data and, unfortunately, the news about inflation was not great,” said Porter.  

As the Bank of Canada’s policy decision approaches, the outlook remains uncertain, with Citi economist Veronica Clark calling the odds of a rate cut “another coin flip,” according to Bloomberg.